Crisil Ratings has provided a more detailed assessment of RBI's Expected Credit Loss (ECL) framework's impact on bank capital, estimating that the new norms will have a one-time net impact of up to 120 basis points on banks' Common Equity Tier-1 (CET-1) ratios. According to The Economic Times, Subha Sri Narayanan, Director at Crisil Ratings, noted that the gross impact of the transition could be as high as 170 bps for most banks, varying based on portfolio composition, past asset quality track record and existing provisioning levels. However, factoring in provisions already made, the net impact is expected to be significantly lower at up to 120 bps. The agency emphasized that the transition is unlikely to materially affect banks' credit strength given the sector's strong capitalisation.
To ease the transition to the new framework, RBI has provided a calibrated transition framework including transitional arrangements for one-time capital impact on account of ECL transition, a three-year timeline for application of effective interest rate on legacy loan accounts, and guidance on key implementation issues. As reported by The Hindu BusinessLine, provisions or loan-loss reserves held against future, presently unidentified losses, which are freely available to meet losses which subsequently materialise, will qualify for inclusion within Tier 2 capital. The framework allows general provisions on standard assets (Stage 1 or Stage 2 assets), and any excess provisions which arise on account of sale of NPAs shall qualify for inclusion in Tier 2 capital. However, these items together shall be admitted as Tier 2 capital up to a maximum of 1.25 per cent of the total credit RWAs under the standardised approach, helping offset the bottomline impact of provisions.
Crisil noted that the most significant impact would arise from Stage II assets, where provisioning requirements could increase sharply compared with current norms. According to The Economic Times, Vojasvi, Associate Director at Crisil Ratings, highlighted that the ECL regime would lead to a structural rise in credit costs as banks will have to provide more for incremental Stage III assets compared with the current 15% mandate for sub-standard assets. Additionally, provisions will be higher even for delinquent assets that haven't yet reached Stage III. The relatively low share of such assets in the banking system--around 2-2.2 per cent--will help contain the overall effect. The new framework will also extend provisioning requirements to off-balance-sheet exposures and undisbursed credit limits, leading to higher overall provisioning.
ICRA estimates that the transition to ECL norms could reduce banks' core capital ratios by less than 150 basis points at the outset, though impact varies significantly across institutions. According to Livemint, several PSBs have indicated that the one-time provisioning hit could reduce net worth by 3–9%, while large private sector banks appear better positioned due to stronger provision buffers, estimated at 2–4% of net worth. Nomura expects public sector banks and mid-sized lenders to bear the brunt of the transition, with the shift leading to higher upfront provisions, particularly in unsecured retail, MSME, and corporate loan segments. Among specific banks, IndusInd Bank estimates 1.5–1.7% of advances (~7–8% of net worth), RBL Bank faces approximately 10% of net worth impact, Kotak Mahindra Bank estimates under 2% of net worth, and Canara Bank and Punjab National Bank are projected at 9% and 6–7% of net worth respectively.
Despite the transition impact, Crisil highlighted that Indian banks are well placed to absorb the ECL framework, supported by a healthy CET-1 ratio of around 14 per cent as of March 31, 2026, and steady profitability with return on assets of about 1.25-1.3 per cent in the last fiscal. As reported by The Economic Times, banks would be allowed to spread the impact over four financial years, while additional provisioning buffers could further mitigate the hit. The agency expects banks' credit profiles to remain stable despite the transition, as the framework will enhance resilience against unforeseen shocks and align India's banking norms with global standards. Banks in general are very well capitalised with system CET1 at 13%+, providing adequate buffer for the transition period.
